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June 8, 2020 – Each of the Debtors and the Debtors' Official Committee of Unsecured Creditors (the “Committee”) have filed objections [Docket Nos. 594 and 604, respectively] to shareholder motions seeking appointment of an equity committee and/or dismissal of the Debtors' cases.
The objections are careful not to further stir shareholder emotions, with the Debtors' "welcoming further participation" from "robust" shareholders and the Committee commending their "inspiring spirit." The "unfortunate" reality, however, is that debt in theses cases is likely to be impaired and equity holders are not set to see a "meaningful distribution," ie they are going to get nothing. Given the economic realities of the Debtors' cases, an equity committee would just add further expense and get in the way. As to dismissal, and the ensuing liquidation, that is a "a drastic remedy that is entirely unwarranted." Just because equity holders are set to be shut out, the Debtors argue, does not mean that there do not remain responsibilities to other (more senior) stakeholders. In politely, but firmly, shutting the door on shareholders, the Debtors sum up: "Dismissal of these chapter 11 cases cannot create value where none exists."
The Debtors’ objection [Docket No. 594] states, “Nothing would make the Debtors happier than for the holders of common stock in J. C. Penney Company, Inc., to receive a recovery in these chapter 11 cases. But while it is premature for the Debtors to take a position on valuation, that outcome appears highly unlikely. J. C. Penney stock was (as of June 5, 2020) trading at $0.32/share and has traded at less than $1 per share for most of 2020. Most of the Debtors’ $4.9 billion in debt is trading at less than 40 cents on the dollar, and certain of the Debtors’ debt — both secured and unsecured—is trading at pennies on the dollar. In the face of these facts, the U. S. Trustee saw fit to place the Indenture Trustee for the Debtors’ Secured Second Lien Notes on the Official Committee of Unsecured Creditors (the “Committee”), suggesting strongly that the Debtors’ secured debt is unlikely to be paid in full. The Debtors are working incredibly hard to make these chapter 11 cases a success for as many constituents as possible, and they welcome the active participation of the Debtors’ equity holders in the process. Participation from the Requesting Holders and others has been robust during the first two weeks of these cases, and the Debtors expect and welcome further participation. But the Debtors and the Committee both already have duties to maximize the value of these estates for the benefit of all constituencies, including shareholders, and adding another layer of professionals to the process is not justified here. Because the Requesting Holders do not meet the standards for appointment of an equity committee, the Motion should be denied.
For similar reasons, the Court should not dismiss the Debtors’ bankruptcy petitions. Relying on the same allegations proffered to support their requests for an Equity Committee, the Requesting Holders suggest that the Debtors’ filing was done in bad faith, such that the Court should dismiss the voluntary petitions under 11 U.S.C. § 1112(b). Dismissal is a drastic remedy that is entirely unwarranted. Dismissal would result in an immediate liquidation to the detriment of the Debtors’ 85,000 employees, their secured and unsecured creditors, and common shareholders, including the Requesting Holders. The Debtors filed their voluntary petitions in good faith, and have continued to work cooperatively with all stakeholders to achieve a resolution to maximize the value of the Company. The Debtors appreciate the contributions of the equity holders to this process, and will continue to work with equity holders to address their legitimate concerns. Regardless of the assertions made by the Requesting Holders, dismissal of these chapter 11 cases cannot create value where none exists.”
The Committee’s objection [Docket No. 604] states, “The profound impact of these chapter 11 cases on all of the Debtors’ stakeholders is not lost on the Committee. The Committee has listened to the statements made by shareholders at hearings, it has read the letters and pleadings filed by them, and its professionals have spent considerable time answering questions and engaging in dialogue with shareholders concerning the Debtors’ capital structure and the economic realities of these cases. The spirit demonstrated by the Debtors’ shareholders is inspiring and reinforces the critical importance of the Committee’s dual objectives in these cases: to preserve the Debtors’ business as an ongoing, well-capitalized enterprise capable of succeeding in today’s challenging retail environment, and to maximize distributable value. These objectives cannot be achieved outside of the chapter 11 context, particularly in light of the Debtors’ significant liquidity constraints, the devastating impact of COVID-19 on the business, and the overarching need to build consensus among the Debtors’ stakeholders through a transparent and collaborative process. Dismissal of these chapter 11 cases would eliminate any prospect of a revitalized J.C. Penney and would extinguish any possible recovery for unsecured creditors. Accordingly, the motion to dismiss should be denied.
The Motion also seeks appointment of an official equity committee. Such extraordinary relief is unwarranted under the unfortunate economic circumstances of these cases and the efforts being made by the Committee to preserve and maximize value. The Debtors’ capital structure and the substantial challenges that lie ahead in these cases, as recently articulated by the Debtors, the Committee, and other constituencies in connection with the Court’s entry of the Final DIP Order, dictate that (i) there is not a substantial likelihood that shareholders will receive a meaningful distribution in these cases, and (ii) an official equity committee’s efforts to maximize estate value would be entirely consistent with, and duplicative of, efforts being made by the Committee. The Committee understands the concerns expressed by shareholders and encourages their continued participation in these proceedings; however, the Committee does not believe the appointment of another official committee is warranted and the Motion should therefore be denied.”
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